Knowledge Center Reports

Paying for Performance in the TSX Composite

May 5, 2014

Companies face increasing scrutiny from shareholders to showcase how their CEO compensation plans are tied to company performance and shareholder value. While shareholder engagement is an important part of this process, setting up an effective pay package is the first step. We’ve examined the use of performance equity among TSX Composite companies and how these equity vehicles can affect overall CEO compensation.

Rising Use of Performance Equity

One of the most common ways to align CEO pay with the overall performance of a company is to grant performance-based equity. This is a growing trend in the TSX composite. In the past three years, there has been a 19.3% increase in the number of companies that have chosen to grant stock or options contingent on performance.

Of the performance equity awards granted in 2012:

• The majority were granted in the form of performance stock units, accounting for 86.9% of all grants.

• Most awards had three-year performance periods, representing 82.0% of new grants. Grants with an unspecified time period followed those at 9.0%, and those with one year performance periods at 5.7%.

Although the final amount that an executive receives from performance-equity is dependent on a company’s stock price, not all grants are settled in stock or options. In 2012, nearly 47% of companies claimed that they would pay the award in cash or have the discretion to pay the award in cash or equity.

Summary Compensation Table (SCT) Pay vs. Realizable Pay

The growing use of performance shares in TSX Composite CEO pay packages has prompted issuers and proxy advisors alike to start measuring pay using a different scale. Although SCT or grant date fair value pay is the standard form of pay disclosure, alternative pay calculations, such as Realizable Pay, allow one to see what CEOs actually earned after accounting for performance.

The graph below shows the 2010-2012 median CEO grant date fair value pay compared to the median Realizable Pay of TSX Composite companies with various levels of performance as measured by TSR. The sample comprises 49 TSX Composite companies whose CEOs received a payout of performance equity in 2012. In calculating Realizable Pay, Equilar included base salary, bonuses, and all other compensation earned during the measurement period. The equity awards included are the time-vested equity granted and the performance-based equity that paid out within the last three fiscal years. All equity awards are valued as of the last day of the most recently concluded fiscal year.

• Median Realizable Pay is lower than SCT pay for companies with below-median TSR and higher than SCT pay for companies with above-median TSR.

Year-over-Year Changes

Overall, both SCT and Realizable Pay show a steady increase in TSX Composite CEO pay from 2010 to 2012. The graph below depicts the year-over-year changes in median SCT and Realizable Pay values for CEOs over a three-year period.

Payout in Relation to Target

TSX composite pay can also be examined in terms of how awards have paid out in relation to their original goals. Forty-nine CEOs in the TSX composite received at least one performance award payout in 2012.

• Although only two companies failed to pay out completely on a performance award, the majority of companies paid out at target or below.

• 28.6% of companies chose to pay these awards in cash in lieu of stock or options.

Please contact Amit Batish at abatish@equilar.com for more information. Amit Batish is the Content Manager at Equilar. The contributing authors of this article are Shelby Dempsey and BJ Firmacion, Senior Research Analysts.